Monetary Policy

Question 1

Which of the following is not a real cost of inflation?
A) Shoe-leather costs
B) Flexibility of real wage adjustments
C) Distortion of relative prices
D) Forced redistribution

Answer 1

B) Flexibility of real wage adjustments

Question 2

Suppose you observe the following Taylor rule:
it = 5% + 0.5(πt − 2%) + 0.5(yt − yn)
where it is the nominal interest rate, πt and yt are current inflation and output, 2% is the inflation target, and yn is the “natural” output level.

Which of the following is true?
A) The monetary authority will not react to recessions.
B) The natural real interest rate is 5%.
C) Real interest rates rise when inflation increases.
D) This Taylor rule leads to price instability.

Answer 2

D) This Taylor rule leads to price instability.

Question 3

Which of the following statements on the HANK model is incorrect?
A) Asset-rich households’ consumption can respond substantially to monetary policy.
B) The portfolio allocation of households does not matter for monetary policy response.
C) The direct effect of monetary policy is weak.
D) All of the above are true.

Answer 3

B) The portfolio allocation of households does not matter for monetary policy response.